As you approach retirement, take this simple step to protect yourself from unforeseen circumstances

An important job in the two or so years leading up to retirement—right up there with figuring out your healthcare coverage and winding down your work activities—is building up a cash cushion. In addition to being there as a source of funding when you eventually retire, cash has the salutary effect of providing a buffer if you retire earlier than you expected due to unforeseen circumstances.As you build out your Bucket portfolio, here’s some guidance on the amount, source, and location of those liquid reserves. Rightsizing Bucket 1 Your cash bucket should consist of one to two years’ worth of portfolio withdrawals, not living expenses. That’s because at least some of your living expenses will likely be coming from outside your portfolio— Social Security or a pension, for example. And the composition of those cash flow sources may well change throughout your retirement.To set up your Bucket 1 initially, think through your cash flow sources for the first few years of retirement. Let’s say a 66-year-old wants to retire in two years and expects that he’ll need to spend $80,000 per year, in total, from his $1.5 million portfolio, at that time. He wants to delay filing for Social Security until age 70, so all of his spending will come from his portfolio in those first few years of retirement. After that, roughly half his spending needs will come from Social Security.If he wanted to be conservative, he could build a cash cushion consisting of $160,000—his years 1 and 2 portfolio withdrawals. His Bucket 2—high-quality bonds—would consist of eight years’ worth of portfolio withdrawals, which at that point will be $40,000 per year (his $80,000 total spending less Social Security income). The remaining $1 million and change could go into a globally diversified equity portfolio. Where to put the money? In addition to thinking through the size of your liquid reserves bucket, it’s also worth considering the “where” of it. Will